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Innovation and Competitiveness
Jan Fagerberg, Centre for Technology,
Innovation and Culture, University of Oslo
(based on joint work with Mark Knell and
Martin Srholec)
What is competitiveness?
• Countries and firms
• Growth and trade – the external constraint
• Explaining competitiveness; cost
competitiveness versus ”non-price factors”
– the ”Kaldor paradox”
• ”non-price factors” cannot be taken for
granted, but needs to be explained
• Innovation and competitiveness?
A simple Schumpeterian growth model
(1) Assume that the GDP of a country (Y) is a function of its
technological knowledge (Q), its capacity for exploiting the benefits
of knowledge (C), and a constant (A1):

Y  A1Q C
(,   0)

(2) Its technological knowledge is a function of knowledge diffused
to the region from outside (D) and knowledge (or innovation) created
in the country (N) and, again, a constant (A2):

Q  A2 D N

 ,  0
(3) The diffusion of external knowledge follows a logistic curve,
where T* and T, represent the frontier country and the country under
consideration
T
d   
T*
(  0)
Why do growth rates differ?
(4) By differentiating (2) and substituting (3) into it we obtain the
growth of a country’s technological knowledge:
T
q       n
T*
By differentiating (1) and substituting (4) into it we get the
country’s rate of growth:
T
y      n  c
T*
Which can be expressed in relative terms to show why growth rates
differ:
y rel
T  Tw
 y  w  
 (n  nw )   (c  c w )
T*
Hence, the rate of growth may be seen
as the outcome of three sets of factors:
• The potential for exploiting knowledge developed
elsewhere.
• Creation of new knowledge in the country (innovation).
• Growth in the capacity to exploit the potential entailed by
knowledge (independently of where it is created).
• Model applied to cross country samples by Fagerberg
(1987) and Fagerberg and Verspagen (2002), both in
Research Policy: All three factors matter, but imitation
becomes harder through time, and importance of
innovation increases
Including international trade . . .
Assume a country’s market share for exports depends on three factors:
its technological competitiveness, its capacity to exploit technology
commercially, and its price (P) competitiveness:



 Q   C   P 
Sx  A3      
QW  CW  PW 
Exports




Q  C
PW 
SM  A4  W  W 
 Q  C   P 
Imports
Differentiating these equations and substituting (4) into them, we
arrive at the dynamic expressions for the growth in market shares:
T  TW
sX   
  (n  nW )  c  cW   (p  pW )
T*
TW  T
sM   
  (nW  n)  c W  c  (pW  p)
T*
The growth of market share
depends on four factors:
• The potential for exploiting knowledge developed
elsewhere, which depends on the country’s level of
technological development relative to the world average.
• Creation of new knowledge (technology) in the country
(innovation) relative to that of competitors.
• Growth in the capacity exploit knowledge, independently
of where it is created, relative to that of competitors.
• Change in relative prices in common currency
• And specialization and demand? (Thirlwall – Kaldor)
The external constraint
If we assume that trade is in balance, we get:
y  sX  sM  ( p  pW )  w
Substituting the dynamic market share equations into this equation
and rearranging gives us the reduced form of the model:
y rel     
T  TW
   n  nW    (c  cW )  1 (   )(p  pW )
T*
And by including demand into the market share equations we
arrive at:
y rel  
   T  TW    n  n     (c  c )  1 (   ) ( p  p )     w
W
W
W

T




*
Which captures the 4 aspects of competitiveness:
Conclusions from the reduced model
• Growth: Catch-up potential +
competitiveness
– Four aspects of competitiveness
•
•
•
•
Technology competitiveness
Capacity competitiveness
Price competitiveness
Demand competitiveness
Data/indicators
• Overall/GAP: GDP per capita
• Technology: R&D, patents and publications
• Capacity: Education, ICT infrastructure,
diffusion (investment and technology licenses)
and social/institutional factors (corruption)
• Price: Growth in unit labour cost
• Demand: Growth of world demand
Sample
49 countries between 1993-2001
Convergence or divergence in GDP per
capita?
Technology Competitiveness
(composite indicator of R&D, patents and publications)
Capacity Competitiveness
(composite indicator of education, ICT, diffusion etc.)
Price Competitiveness
(change between 1993 and 2001)
Demand Competitiveness
Analyzing the dynamics
• High explanatory power, robust results
• Potential for diffusion important, but
conditional on:
• Technology and capacity competitiveness
• Price competitiveness
• Demand competitiveness?
Results of OLS regression
Why Growth Rates Differ?
Actual and estimated differences in growth vis-à-vis
the world average, 1993-2001
What explains the change in technology
and capacity competitiveness?
Convergence or divergence in the global
economy?
• Forging ahead (technology): Asian tigers
• Catching up, for different reasons, EUacceding and Asian Developing
• EU, ”Middle of the road”, with small EU
countries doing better than large ones
• Falling behind, along all dimensions, former
CIS/South-East Europe